VERIGY LTD. $12 (Nasdaq symbol VRGY, Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 58.2 million; Market cap: $698.4 million; Price-to-sales ratio: 1.5; WSSF Rating: Extra Risk) designs and makes test systems that are used in the production of computer chips. Verigy’s products help chipmakers cut down on errors and improve the reliability of their products. The company has installed more than 4,500 of its systems worldwide.
Aside from test systems, Verigy sells consulting and support services. These include start-up assistance, and system calibration and repair. These account for around 45% of Verigy’s revenue, and help lower the company’s reliance on sales of new systems, which have been slowed by the recession.
Verigy lost $25 million, or $0.44 a share, in its second quarter, which ended April 30, 2009. Still, that was a lot better than analysts’ predictions of a loss of $0.65 a share. In the year-earlier quarter, Verigy earned $13 million, or $0.22 a share. These figures exclude non-recurring items, particularly costs related to an 18% cut to its workforce in 2008. The layoffs should lower Verigy’s annual expenses by $60 million. The company expects to complete the plan by the end of this year. Revenue dropped 56.2%, to $71 million from $162 million.
Verigy continues to spend about 28% of its revenue on research, so it’s more profitable than it appears. This spending will help Verigy expand its sales and market share once the economy starts growing again. The company holds cash of $262 million, or $4.50 a share, and has no debt.
The company expects its revenue to rise by 10% to 25% in the third quarter. Demand for consumer electronics is growing in China, thanks to an economic-stimulus package implemented by the Chinese government. Growing sales of netbook computers and cellphones should also prompt chipmakers to upgrade their testing equipment as they look for ways to lower production costs and maintain their profit margins.
Verigy will probably lose $2.25 a share this year. But its losses should shrink to $0.25 a share in 2010 as it realizes more of the benefits from its restructuring plan.
Verigy is a buy.
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